Are REIT Dividends Taxed as Ordinary Income?

Posted Mar 3, 2023


REITs can provide a low capital entry point for those who want to get involved with real estate investing. They can provide dividends and potential capital appreciation. However, taxation is quite different between REITs and real property. Do REIT dividends offer any of the tax benefits that real property income provides, or is it all taxed as ordinary income?

REIT Income Taxation

On the surface, public REITs behave similarly to stocks. These REITs move up and down and can throw off dividends or income. The income components paid out by REITs can have different taxation.

When a REIT sells a property at a profit, it generates a capital gain. Short-term capital gains are taxed at your ordinary tax rate. Long-term capital gains rates are capped at 20%.

Some REIT dividends are qualified dividends. These dividends receive special tax treatment since they are taxed at long-term capital gains rates.

REITs may also return principal to investors. Because this is just a return on invested capital, it is not taxed.

Unfortunately, for many REITs, dividends are taxed at ordinary income tax rates. Taxation between private and public REITs is similar.

REIT income is considered pass-through income. REITs distribute around 90% of their income to shareholders. REITs aren’t taxed on the majority of their income. Instead, the shareholders are taxed, which is why the income is called pass-through. Not only does the income pass through to shareholders, but so does taxation.

How do you know if your REIT dividends are taxed at ordinary income tax rates, qualified dividends, capital gains, or a return of capital? Brokers or sponsors (for private REITs) send out 1099-DIVs to investors, which break down the different types of dividends an investor receives.

REITs and Retirement Accounts

What does REIT taxation mean for retirement accounts? Because retirement accounts are not taxed, as many of them defer taxation until distributions are taken, any taxes on REIT dividends are deferred. REIT dividends can compound in these accounts tax-free, at least until distributions are taken.

This is different from a Roth IRA. Roth IRAs don’t pay taxes on distributions. Once a REIT is put into a Roth IRA, dividends can grow tax-free. Unlike a 401(k) or Traditional IRA, investors won’t owe taxes on these REIT dividends once distributions are taken.

Because REIT dividends are printed on a 1099-DIV, distinguishing the different types of REIT distributions is fairly simple. However, because taxes are unique to each individual and can get fairly complex, it’s best to work with a tax specialist when determining the taxation of REIT dividends.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.

A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.

REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.

There are risks associated with these types of investments and include but are not limited to the following:

  • Typically, no secondary market exists for the security listed above.
  • Potential difficulty discerning between routine interest payments and principal repayment.
  • Redemption price of a REIT may be worth more or less than the original price paid.
  • Value of the shares in the trust will fluctuate with the portfolio of underlying real estate.
  • There is no guarantee you will receive any income.
  • Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes.

This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.

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